Don’t let the crypto winter go to waste


Regulators should not miss this once-in-a-lifetime opportunity to confront a clear threat to the financial system.

The electronic money granted market WE policymakers the opportunity of a lifetime. Less than a year ago, it was on track to become a systemic threat, gathering disciples, leverage, and political influence faster than regulators could grasp. Then the danger magically vanished: The market exploded before reaching critical volume, entering the “crypto winter” that persists to this day.

This event may not last long. Policymakers should act now to impose some much-needed rules on this market.

The problem areas were clear. Number 1 is a stablecoin, or purported digital token worth a dollar, and used by speculators to gain leverage or to transfer funds between bets. At their peak, such coins attracted more than $160 billion, whose issuers invested in assets ranging from corporate debt to corporate debt. Bitcoin arrive Nothing at all. The danger is that a sudden loss of confidence can trigger an exodus, as happened with Terra stablecoins in the May. The more frequently an issuer holds assets, the greater the likelihood of disruption – for example, in markets that real-world companies rely on for payroll and working capital growth.

Another threat arises if commercial banks are exposed to cryptocurrencies, either directly or through giving to companies and hedge funds. For example, if the major banks were among the creditors of the now bankrupt institutions Celsius or Three Arrows Capital, which at their peak had tens of billions of dollars in aggregate debt, the crisis Cryptocurrencies can cause much greater damage. Fortunately, regulators seem to have prevented such an outcome and remain vigilant, although they have yet to adopt any formal rules.

In addition, countless digital tokens and trading venues – including major exchanges due to Coinbase and Crypto.com – largely do not face the same standards of consumer protection, disclosure, governance, safety and soundness as traditional assets and financial intermediaries. As a result, the market is rife with hacks, manipulations, self-dealing, and outright fraud, as regulators like the Securities and Exchange Commission and the Commodity Futures Trading Commission struggle to figure out how to cope and Who what should be in charge.

The best, Conference will impose some order. There are many proposed laws, some of which are good. One The (reasonable) bipartisan bill would require stablecoins backed by high-quality assets to be disclosed on a regular basis and establish oversight over crypto exchanges and tokens. That said, it will also complicate things by creating a new category of “backend assets” for certain digital tokens and including dubious measures like tax breaks for the “miners” handle blockchain transactions. Also, with midterm elections looming, lawmakers are unlikely to get ahead any time soon.

Officials don’t need to wait for Congress. For their part, bank regulators have the power to create a limited charter for stablecoin issuers: Those who meet the necessary standards, including assets and governance, can receive privileges such as access to accounts at the Federal Reserve; others will face close scrutiny and possible sanctions. Authorities may also impose strict capital requirements, ensuring that any exposure to cryptocurrencies is funded with equity that banks can afford.

For tokens and exchanges, the SEC and CFTC should cooperate. It hardly matters whether something is called a security or a commodity, as long as there is some established transparency and accountability. To that end, former CFTC president Timothy Massad and Harvard Law School professor Howell Jackson have made a promising proposal: agencies should create an industry-funded organization (similar to the Treasury Department). main Industry Regulatory Authority) will set reasonable standards for all relevant crypto institutions and instruments. As with stablecoin issuers, non-compliant institutions are at risk legal consequence.

The underlying technology of the cryptocurrency may not yet deliver, but the speculative frenzy surrounding it still has the potential to do a lot of damage. Rarely has history allowed the authorities a second chance to confront such a clear threat to the financial system. Don’t let it go to waste.

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